How to Make Hard Money Decisions Easy

Are you stuck trying to decide where best to put your money? Are you overwhelmed by all the choices? Here’s a simple but powerful tool to help you.

A recent article in The New York Times highlights how we make money decisions, even though we’re not always aware of it.

“Every one of us makes money trade-offs nearly every day, whether we realize it or not…But all too often these trade-offs are subconscious, which means we don’t discuss them openly and fail to question them relentlessly.”

And we fail to question them relentlessly because we don’t have an organized, systematic way for deciding when options are varied and numerous. So, what can you do to help make hard money decisions easy? Fill out a tournament bracket.

March Money Madness

If you’re at all familiar with the college basketball tournament, you know what a bracket is. You’ve probably been asked 20 times in the last few days whether you’ve filled one out.

If you’re not familiar with the tournament, it starts with the 68 best college basketball teams. In the first round, they match the strongest versus the weakest of the field. This seeding results in multiple David versus Goliath battles. Goliath usually wins, but sometimes David defies the odds. The winners move on and the losers go home until there is 1 team left standing. In other words, it’s a process of elimination. It’s survival of the fittest–Darwinism played out (literally) over a few short weeks.

That’s why you watched Butler play Winthrop, even though you have no attachments to either school and probably wouldn’t watch it in a regular season game. The bracket changes everything.

Tournament brackets are a great tool when you have to make decisions among many and varied options. Even better? They’re fun. (I even used them to help decide my children’s names!)

So why not apply brackets to help you with your money decisions?

Setting Up Your Bracket

  • First, get a bracket. So that you don’t have to draw one up yourself, go here to get a bracket. Choose the “Sweet 16” bracket since anything more would take too much time to set up.
  • Second, group the bracket. Group it into the 4 major “regions” where we allocate our money:
    • Spending
    • Saving
    • Investing
    • Giving
  • Third, find 4 for 4. For each of the 4 regions, find your 4 most important expenses. However, exclude your shelter (mortgage / rent, gas, and electricity) and groceries from this bracket. Since you probably don’t want to be hungry and homeless, these expenses are not a choice (unless you’re making a decision on whether you should downgrade your house.). A tournament that always ends up with the same winner is not really a tournament. Within each region, it doesn’t really matter how you seed them. For example, within the “Saving region,” there’s no difference whether you’ve matched up “Bank” with “Putting it in the Mattress,” or with a “Certificate of Deposit.” The regions are just to help you organize your thoughts. What matters is that you start eliminating.
  • Fourth, eliminate: Within each match, find the winner and eliminate the loser. Most of your battles will be fairly easy, but others will come down to the wire. In those hard instances, go with your gut first. You can always go back and redo it if it’s clear in the later rounds that it shouldn’t be there.

Average Joe / Jane’s Bracket

I put myself if the shoes of the Average Joe / Jane and asked myself how I would spend my money after I’ve taken care of my needs.

According to Nerdwallet, here’s a profile of Average Joe / Jane:

  • Average Household Income: $75,591
  • Average Credit Card Balance: $16,748
  • Average Student Loans: $49,905
  • Average Savings Rate: 5%

(The average credit card and student loan balances are for households that have that type of debt. Since some households don’t have any credit card balances or student loans, Nerdwallet removed those households in those averages.)

Now, let’s spend some time looking at the match-ups and my rationale.

Round 1:

  • Saving:
    • Mattress vs. Bank. One offers no returns, the other measly returns. One offers no protection in case you get robbed, the other offers insurance of up to $250,000. The mattress comes up soft against the bank.
    • Certificate of Deposit vs. Treasuries. This is kind of like the Worst Chef in America contest: no choice is all that exciting. Neither offer great returns, and neither are very liquid. Remember, you only want to keep savings for an emergency and invest the rest. But you also want to make sure you can access it when the unpredictable emergency does come. Short-term CD wins in the lowest scoring game in the history of the tournament.
  • Investing:
    • Maxing out 401K vs. Hot Stock Tip. There are 3 reasons Hot Stock Tips work: 1) illegal insider information, 2) you know that very, very rare person who is very, very good at stock picks, or 3) you got lucky and it worked out. You probably don’t want to make a habit of investing your money based on breaking the law, lightning striking, or luck. By maxing out your 401k, you don’t know how you’ll perform, but you are certain to get the tax benefits. The Hot Tip has a cold shooting night and maxing out your 401k advances.
    • The S&P 500 vs. Yourself. In 2008, Warren Buffett made a bet that the S&P 500 would out perform and hand-picked basket of hedge funds by the end of 2017. So far Buffett is winning handily. The S&P 500 is very, very hard to beat over the long run. But…investing in your skills and learning can enable you to make more money that can go toward investing in the market. Think of the S&P 500 like a horse that runs farther than the others. Strategically investing in yourself allows you to make more money to invest, which is like adding a 5th leg to that horse. In a major upset, investing in yourself takes this one.
  • Giving:
    • Organizations that Help the Needy vs. Your Broke, Spendthrift Sister. Family members asking for money is a hard thing. It gets even harder when the money is actually given. John D. Rockefeller bailed out his brother numerous times. Did it lead to his brother getting better or more responsible? No. His brother continued to engage in risky behaviour (perhaps emboldened because he knew his John would bail him out?) and became resentful of John for not giving him more. Chances are, members of your family have more resources than someone who’s homeless or living in a 3rd world country. And chances are with your broke sister, it’s not a money issue, it’s a habits issue. Whereas, the child born in a 3rd world country didn’t hit the geographic lottery you did. But they did hit the buzzer beating shot to move onto the next round.
    • Person on the Street vs. Research Solving Problems. You have $10 you want to give. You see someone on the street asking for money. Your heart tugs. Then you think about the child in the hospital battling cancer. And your heart breaks. How do you assess one need versus another? This one is very personal. For me, it’s research so that the next generation can benefit. Research wins in overtime.
  • Spending:
    • Luxury Goods vs. Experiences. You might be thinking this is no contest. With a luxury good, you get to keep something. With eating out, it’s over in a couple of hours. However, researchers from the University of Michigan also found that the more the purchase is experiential, the happier we are. Makes sense. We get used to “stuff.” But things that help us deepen our relationship or enable us to do more makes us happier.
      • Material Good: Purchase in order to “have.” Like that pair of jeans.
      • Experiential Good: Purchase in order to “do.” Like traveling or dining out.
      • The result? Dining out beats Luxury Goods in an upset.
    • Credit Cards vs. Prepaying Your Mortgage or Student Loans. Remember, this scenario assumes you’ve already paid your credit card minimums and mortgage / student loans and are deciding what to do with the money left over. In that context, it’s no contest. Credit card rates are 10% or more. Mortgage rates and student loans are less than 10%. Pay off the more expensive debt. Credit cards rates have the height advantage and advance to round 2.

Off to the Elite 8

That’s it for round 1 of this Sweet 16 matchup. Were you expecting these 8 to advance? It featured some close calls and upsets, but hopefully the rationale made sense. Here’s a summary of our next round matchups:

  • Investing: Maxing out 401k vs. Yourself
  • Saving: Bank vs. CD
  • Giving: Organizations that Help the Needy or Research the Solve Problems
  • Spending: Experience vs. Credit Cards

In my next post, we’ll analyze how these Elite 8 match up against each other and get one step closer to determining our March Money Madness champion!

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